Update to CARES Act – SBA Issues New Guidance on PPP Loan Forgiveness

Update to CARES Act – SBA Issues New Guidance on PPP Loan Forgiveness

On May 15, 2020, the U.S. Small Business Administration (“SBA”) released its long-awaited guidance on the forgiveness of Paycheck Protection Program (“PPP”) Loans, in the form of the Paycheck Protection Program Loan Forgiveness Application (the “Application”). The Application contains four components – 1) the PPP Loan Forgiveness Calculation Form, 2) the PPP Schedule A, 3) the PPP Schedule A Worksheet, and 4) the PPP Borrower Demographic Information Form. In order to qualify for forgiveness, a Borrower must provide its Lender with a complete PPP Loan Forgiveness Calculation Form and the PPP Schedule A. The PPP Schedule A Worksheet, on which the Borrower must identify each employee employed during the covered period and allocate payroll costs incurred by each such employee (amongst other things), must be completed and maintained within the Borrower’s records for six years after forgiveness, but is not required to be submitted to the Lender at the time of application for forgiveness. The PPP Borrower Demographic Information Form is completely optional. Accompanying the Application are a set of very detailed instructions which highlight several new developments in the manner in which the forgiveness program will be interpreted and administered. The following are a few of those developments:

  1. Expansion of “Covered Period” –The CARES Act provides that forgiveness will apply to certain costs incurred and payments made (more on this later) during the “Covered Period”, which is defined as the 8-week period beginning on the date of the origination of the PPP Loan (i.e. the date the loan is disbursed to Borrower). The Application clarifies that Borrowers now have the option of designating an “Alternative Payroll Covered Period,” which will begin on the first day of the Borrower’s first pay period following the date of disbursement. This Alternative Payroll Covered Period may be used instead of the “Covered Period” for calculations related to payroll costs and forgiveness reductions, but not for the calculations related to non-payroll costs eligible for forgiveness, such as interest on mortgage debt, rent, and utilities.

  2. Loans greater than $2 million, affiliates included – The Application contains a check-box which must be checked off by Borrowers who, together with their affiliates, have received PPP loans in excess of $2 million. The FAQ for Lenders and Borrowers (the “FAQ”) published and periodically updated by the SBA, in questions 39 and 46, had already made clear that such Borrowers would be subject to a review of their loan file by the SBA and Department of Treasury, so it should be no mystery why this check-box is included in the Application. However, the significance of this inclusion is that Borrowers must now actively confirm whether their loan amount combined with their affiliate’s loan amount(s) exceeds the $2 million threshold in order to provide the accurate information on the Application. This will require such Borrowers to interpret the affiliation rules contained in the regulations concerning the Small Business Act and the prior regulations released regarding the CARES Act in order to accurately check the box.

  3. Payroll Costs incurred but not paid may be forgiven– According to the instructions for the PPP Loan Forgiveness Calculation Form, payroll costs fall within the Covered Period or Alternative Covered Period, and are therefore eligible for forgiveness, when they are either 1) paid, meaning a paycheck has been distributed or an ACH credit transaction has been originated, or 2) not paid, but incurred during the last pay period of the Covered Period or Alternative Payroll Covered Period, as applicable, and paid on or before the next regular payroll date. This clarifies the meaning of the phrase “costs incurred and payments made during the covered period,” as used in the CARES Act with respect to payroll costs eligible for forgiveness.

  4. Payroll costs forgiveness capped at $15,385.00 per employee – the CARES Act has always specified that “payroll costs” do not include “the compensation of an employee in excess of an annual salary of $100,000.00, as prorated for the covered period.” Now, that exclusion has been condensed to a specific number – $15,385.00. In the PPP Schedule A Worksheet, Borrowers must not allocate more than this amount to any single employee.

  5. FTE calculation revealed – Under the CARES Act, a Borrower’s forgiveness amount will be reduced by a factor based on a reduction in the average “full-time equivalent employees” (“FTE”) during the covered period. After much speculation as to whether FTE’s would be calculated in accordance with I.R.S. standards or otherwise, the Application has revealed two ways in which FTE’s may be calculated for purposes of determining the reduction factor – 1) for each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth, capped at 1.0 or 2) employees who work 40 hours or more per week are assigned 1.0 FTE, and all other employees are assigned a .50 FTE (the “simplified” method).  Under the first method, for example, if an employee Is paid an average of 35 hours per week, he or she will count as .9 FTE (.875 rounded to the nearest tenth).

  6. New exceptions to reductions in forgiveness – Now, the reductions in the forgiveness amount due to reduction in FTE will not apply 1) for any positions for which the Borrower made a good-faith, written offer to rehire an employee during the Covered Period or Alternative Covered Period which the employee rejects, and 2) for any employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours, during the Covered Period or Alternative Covered Period. The exception will not apply to either if these categories if a new employee is hired to replace the one lost. One thing to note is that these exceptions are limited to events occurring in the 8-week Covered Period or Alternative Covered Period. This may be significant since some of these events may have occurred outside the 8-week period but may nonetheless factor into the reduction calculation. For example, if any employees voluntarily resigned after February 15, 2020 (the date which a Borrowers FTE numbers during the Covered Period or Alternative Covered Period are compared against) but before the Covered Period or Alternative Covered Period begins, then they will presumably factor into the reduction in FTE’s per the calculation in the Act, even though they were not terminated by the Borrower.

Here is a link to the Application, in its entirety – https://www.sba.gov/sites/default/files/2020-05/3245-0407%20SBA%20Form%203508%20PPP%20Forgiveness%20Application.pdf

For the latest updates on PPP Loan Forgiveness Guidance, contact our corporate law or banking and finance teams for more information. To see other legal updates that are occurring from COVID-19, visit our resources page HERE.

Update Regarding CARES Act PPP Loan Program – Safe Harbor for Loans under $2 Million

Update Regarding CARES Act PPP Loan Program – Safe Harbor for Loans under $2 Million

On May 13, 2020 the U.S. Small Business Administration (“SBA”) published new guidance clarifying prior guidance which had left many loan recipients confused and fearful of potential penalties associated with their PPP loans. To recap, over the last few weeks there has been much news and discussion debating whether companies who have received PPP Loans were actually eligible at the time they applied for the loan, and whether they should return the money. This came on the heels of the SBA’s publication of Question 31 on its Payment Protection Program Frequently Asked Questions document (the “FAQ”) on April 23, 2020, which states that recipients should have considered their economic need for the loan, including their current business activity and adequate sources of liquidity, at the time they applied for the loan. FAQ 31 goes on to permit recipients to pay back their PPP loans without any penalty for making bad-faith certifications on their application, before May 7th (a deadline that was subsequently extended to May 14th). Ultimately, FAQ 31, as well as the subsequent interim final rules issued by the SBA, simply added to the confusion surrounding the PPP Loan program, and led many borrowers to pay back their PPP loan out of concern that they might be investigated by the SBA for inadvertently making bad-faith certifications on their loan application.

The newly published Question 46 of the FAQ clarifies that any Borrowers of PPP loans under $2 million will be subject to a “safe harbor,” meaning that they are automatically deemed to have made the certifications regarding their need for the PPP loan in good faith, and will not be subject to investigation or penalty. This guidance provides relief to the vast majority of Borrowers, as only a relatively small number of Borrowers have received loans in excess of $2 million, per the SBA’s published data. For those Borrowers who did receive loans in amounts greater than $2 million, Question 47 of the FAQ extends the deadline to pay back the PPP loan through May 18, 2020, so they have a few more days to consider whether they should pay back their PPP loan. In doing so, the following are a few factors these Borrowers should consider:

1) any sources of liquidity, including lines of credit of cash reserves, that the Borrower and/or its affiliates may have had access to at the time they applied for the PPP Loan,

2) whether tapping into those other sources of liquidity to cover the business’s payroll costs, rather than taking the loan, would have been significantly detrimental to the business;

3) whether those sources of liquidity are needed to cover expenses other than payroll costs or cannot be used for payroll costs for other reasons;

4) how the economic uncertainties made applying for the PPP loan a necessary action to secure the survival of your business; and

5) how the pandemic and the government mandated shut down orders have actually affected the underlying stability of your business.

Borrowers should document these details, as well as any other reasons they believe the PPP Loan was necessary to support its ongoing operations, in a brief memorandum in preparation for a review by the SBA and Department of Treasury, who have pledged to review every loan in excess of $2 million following the Borrower’s request for forgiveness. This review will likely look at the Borrower’s initial need for the loan, as well as the Borrower’s use of the loan proceeds, to ensure compliance with the terms of the CARES Act and the subsequent released guidance and regulations. In fact, it may be prudent for Borrowers with loans under $2 million to prepare a brief memorandum for their records, in case their lender asks them to reconfirm their certification that the current economic uncertainty made the loan request necessary to support the ongoing operations of their business.

FAQ 46 also states that if the SBA and Department of Treasury determine that a Borrower did not make the certifications regarding their need for the PPP Loan in good faith, and did not return the funds in a timely manner, it will “seek repayment of the outstanding PPP loan balance” and will deem the Borrower ineligible for forgiveness, but will not pursue any other penalties in connection with the bad-faith certification as long as the Borrower pays back the PPP Loan. Ultimately, Borrowers of PPP Loans in excess of $2 million can still have a legitimate basis for their application, but will need to make sure they are prepared to defend that basis when the SBA and Department of Treasury review their loan.

The periodically updated FAQ can be found on the SBA website at https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf.

If you would like to discuss the Cares Act with an attorney, you can contact us here.

Update Regarding CARES Act PPP Loan Program – Safe Harbor for Loans under $2 Million

Updates to SBA Loans Under CARES Act

UPDATE 4/6/20 – The Small Business Administration (“SBA”) has released an Interim Final Rule regarding implementation of the CARES Act. The text of the Interim Final Rule can be found online at https://www.sba.gov/sites/default/files/2020-04/PPP–IFRN%20FINAL_0.pdf. The following is a list of the most impactful clarifications of the Paycheck Protection Program that are contained within the Interim Final Rule –

  • Payments to Independent Contractors and Sole Proprietors will not be considered within the calculation of “Payroll Costs” for purposes of the loan amount and the forgiveness amount.
  • A borrower must use at least 75% of the loan proceeds for payroll costs. It was previously understood that this limitation would be applied with regard to the amount of the loan forgiven, but now we know that it also applies to the approved use of the loan proceeds as well. In other words, the 75% rule applies to how the funds are used on the front-end, as well as how much is forgiven on the back-end.
  • The Interest Rate will be 1%
  • The Maturity Date will be 2 years, for any loan amount that is not forgiven

The Coronavirus Aid, Relief, and Economic Security Act (or CARES Act), a $2 Trillion package, was signed into law on Friday, March 27, 2020, and provides for a substantial expansion of Section 7(a) of the Small Business Act for the period between February 15, 2020 and June 30, 2020 (the “covered period”) called the Paycheck Protection Program. Businesses are now eligible to apply for business loans under Section 7(a) and should consider the updated rules to evaluate eligibility.


Who is eligible for loans under the CARES Act?

7(a) loans will no longer be limited to “small business concerns”; instead, during the covered period, such loans will be available to

  • any business concern, nonprofit organization, or veterans organization which employs not more than 500 employees OR, if applicable, complies with the size standard set forth by the Administration, which may be located online at https://www.sba.gov/document/support–table-size-standards;
  • Sole proprietors, independent contractors, and “eligible self-employed individuals” who are also entitled to the qualified sick leave tax credit under Section 7002 of the Families First Coronavirus Response Act; and
  • Businesses with more than one physical location, if they employ no more than 500 employees per physical location and are assigned a North American Industry Classification System (NAICS) code beginning with the number 72.
  • For the above categories, employees employed on a full-time, part-time, or other basis may be counted.

The requirement that applicants not have access to credit from other sources has been eliminated for the covered period.


Maximum Loan Amount

The maximum loan amount offered to an applicant will be calculated using the following formula, but will not exceed $10,000,000.00.

  • 5x –
    • The average monthly Payroll Costs (as defined below) for the 1-year period before the loan is made, or
    • If the applicant was not in business between February 15, 2019 and June 30, 2019, the average monthly Payroll Costs between January 1, 2020 and February 29, 2020, or
    • If the applicant is a seasonal employer, the average total monthly Payroll Costs between February 15, 2019 or March 1, 2019 (at the election of the Borrower) and June 30, 2019.
  • Plus the outstanding balance of any Economic Injury Disaster Loans made under Section 7(b)(2) of the Small Business Act after January 31, 2020, which may be refinanced under this loan.

Payroll Costs include:

1) salary, wages, commissions, tips, or other such compensation to employees, sole proprietors, or independent contractors up to $100,000 per year, as prorated for the covered period,

2) payment of vacation, parental, medical or sick leave,

3) allowance for dismissal or separation, group health care benefits, including insurance premiums;

4) retirement benefits; and

5) state or local taxes on compensation.


Payroll Costs do not include:

1) compensation to individuals in excess of an annual salary of $100,000, as prorated for the covered period;

2) certain taxes under Chapter 21, 22, or 24 of the Internal Revenue Code;

3) payments to employees who do not reside in the United States; and

4) qualified sick leave for which credit is allowed under Sections 7001 or 7003 of the Families First Coronavirus Response Act.


Forgiveness of Loans under CARES Act

The CARES Act requires lenders to forgive certain amounts (based on Payroll Costs and other expenses of Borrower) of the 7(a) loans obtained during the covered period.

  • Calculation of “Amount Forgiven” –
    • an amount equal to the sum of following costs incurred by the Borrower during the 8-week period following the origination of the 7(a) loan –
      • Payroll Costs (including additional wages paid to tipped workers);
      • Payments of Interest (but not Principal) on any mortgage obligation which is owed by the Borrower, is a mortgage on real or personal property, and existed prior to February 15, 2020;
      • Rent on any lease in force before February 15, 2020; and
      • Utility payments, including for electricity, gas, water, transportation, telephone or internet access, if those services began before February 15, 2020.
      • Note – recent guidance from the Department of Treasury states that “due to likely high subscription,” it is likely that non-Payroll Costs will be limited to 25% of the Amount Forgiven. This may be addressed by the regulations that will be issued by Small Business Administration in the coming weeks.
    • Reduction of amount forgiven – the “Amount Forgiven” will be reduced (but not increased) by
      • Reduction due to reduction in number of employees – multiplying the Amount Forgiven by a decimal obtained by dividing –
        • The average number of full-time equivalent employees per month employed during the 8-week period following the origination of the 7(a) loan; by
        • The average number of full-time equivalent employees per month employed between February 15, 2019 and June 30, 2019 OR between January 1, 2020 and February 29, 2020 (at the election of the Borrower, unless the applicant is a seasonal employer, in which case the former shall be used).
      • Reduction due to reduction in salary – The “Amount Forgiven” shall also be reduced by the amount of any reduction in total salary or wages of any employee during the 8-week period following the origination of the 7(a) loan by more than 25% from the most recent full quarter, if that employee did not receive wages or salary during any pay period in 2019 which would have amounted to more than $100,000 if annualized.
      • Exemption to reduction of Amount Forgiven where employees re-hired or salaries restored to prior amounts – the Amount Forgiven will not be reduced, as stated above, by reductions in the number of employees or salary of employees which occur between February 15, 2020 and April 26, 2020, IF those employees are re-hired and/or salaries are restored prior to June 30, 2020.

Amounts forgiven under this program will not be considered as gross income for purposes of taxation.


Other important facts regarding the loan program under the CARES Act

  • Application Procedures: You may apply through any existing SBA-approved Lender. A list of those lenders currently approved to provide SBA loans can be found online at https://www.sba.gov/partners/lenders/microloan-program/list-lenders. Other lenders may become approved and enrolled in the program over time, so you may consult with your lender if they do not appear on the list to determine if they will be offering loans under the Paycheck Protection Program. Applications can be made beginning on April 3, 2020 for small businesses and sole proprietorships, and April 10, 2020 for independent contractors and self -employed individuals. A copy of the application form for the Paycheck Protection Program can be found online at https://www.sba.gov/sites/default/files/2020-03/Borrower%20Paycheck%20Protection%20Program%20Application_0.pdf. We recommend that businesses review the application to ensure they can provide all the requested documentation and certify the necessary information.
  • Loan proceeds must be used for the following purposes – Payroll Costs, payments of interest (but not principal) on any mortgage obligation, rent (including rent under a lease agreement), utilities, and interest on any other debt obligations that were incurred before the covered period.
  • No Personal Guarantee or Collateral will be required during the covered period.
  • The interest rate for a loan is capped at 4%, but according to guidance recently issued by the Department of Treasury, which can be found online at https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses, the interest rate will be .50%.
  • Loans will be deferred for 6 months, according to Department of Treasury Guidance.

Each business is unique, so companies should review the various disaster relief loan programs available before choosing which one works best for your needs. If you are interested in discussing your business loan options with an attorney, our team is here to assist you with navigating the changing legal landscape due to COVID-19. For more information on ways our attorneys can help you during this time, visit our COVID-19 Response Team page HERE.


*Disclaimer: The information contained herein provides an overview of developing and ongoing legislation and does not constitute legal advice for any particular situation.